Gold and U.S. dollar both fall: Why?

After a decline of 2.31% last week, the U.S. Comex gold futures dropped 0.88% this week and fell 1.47% on Tuesday alone. As of Wednesday Asia morning, gold futures rebounded 0.45% to around $1,703. The S&P 500 index fell 0.64% while the Euro Stoxx 50 index jumped 0.60% this week. The Dollar Index fell below 80 on Monday and ended at 79.644 on Tuesday.

Global Manufacturing PMI Improvement Masks Divergences

The global manufacturing index rose to 49.7 in November from 48.8 in October. China's November HSBC/Markit manufacturing PMI is particularly encouraging, rising to a thirteen-month high of 50.5, further confirming China's recovery. However, the U.S. November ISM manufacturing index fell to 49.5 from 51.7 in October, compared to a survey of 51.4. The fiscal cliff, investment concerns and weaker external demand are hurting U.S. manufacturing despite a recovery in housing. The Eurozone PMI ticked up from 45.4 last month to 46.2 although Eurozone's October unemployment rate was at a record high at 11.7 percent.

Why Did Gold and the Dollar Fall Together?

The plunge in gold prices on Tuesday was accompanied by a fall in the Dollar Index. After breaking its 100 moving-day average at $1,698, gold futures plunged further to $1,692.60 on Tuesday before recovering. The recent surge in daily volatility in gold is probably related to large funds liquidating positions or algorithmic-selling in addition to market's lack of confidence of gold to break $1,800. The U.S. fiscal cliff bickering further eroded market confidence. On the other hand, the 10 billion Euros Greek bond buy-back which is used to reduce Greece's debt started this week and may go better than expected. The ESM has also approved its first tranche of payment. Euro/Dollar surged past 1.30 on Monday.

Central Bank and the ETF Demand Stay Strong

The South Korean Central Bank added 14 tons of gold in November to about 1.2% of FX reserves while the gold-backed ETP holdings climbed to another record of $2,627.035 tons according to Bloomberg. These suggest that dips in gold prices are likely to be supported by the longer-term players such as the Central Banks.